Child Support Amendment Bill
Commentary on the Bill
Hon David Cunliffe
Associate Minister of Revenue
First published in August 2005 by the Policy Advice Division of the Inland Revenue Department,
P O Box 2198, Wellington.
Child Support Amendment Bill; Commentary on the Bill.
ISBN 0-478-27128-X
CONTENTS
Overview
Write-off of penalty debt
Exemptions from liability
Determinations initiated by Inland Revenue
Appeal rights following an administrative determination
Acceptance of overseas birth documents
Remedial issues
Continuity of administrative determinations
Offsetting rules
Order of payment application
Credit transfers
Powers in relation to reciprocal agreements
Drafting issues
Overview
Under the major change proposed in the Child Support Amendment Bill, the government will forgo the collection of some penalties to provide an incentive for non-payers to begin making payments of financial support again. If they do, and if they maintain their payments of both current financial support and an agreed amount of their arrears for a specified period, some of their accumulated penalty debt will be written off.
“Financial support” consists of child support and spousal maintenance. Similarly, the term “liable person”, as used here and in the legislation, includes those responsible for paying either form of financial support. The term “liable parent” is used when child support is the only form of financial support involved.
Child support is payable to custodians of children or to the Crown when custodians are social welfare beneficiaries, to offset the cost of providing income maintenance. Spousal maintenance is payable to former marriage, civil union and de facto partners. Penalties are payable to the Crown.
Also proposed in the bill is a change that will allow Inland Revenue itself, not just custodial parents, to initiate reviews of liable parents’ financial affairs when it suspects they are paying less child support than they should. The change is intended to counter the practice of liable parents structuring their affairs to minimise the child support they have to pay.
Two new exemptions from liability for child support are the subject of further amendments. The Child Support Act 1991 already provides an exemption for long-term hospital patients and prisoners, who are not able to earn income. The bill extends the exemption to young people under 16, who are in a similar position, although the exemption will not apply if they undertake part-time or casual employment. The bill also introduces a new, permanent exemption for victims of sex offences.
Other significant changes will allow respondents to a child support administrative review the right to appeal to the Family Court if they are dissatisfied with the outcome, and allow Inland Revenue to accept documentation from other countries as proof of parentage.
The remaining changes are remedial in nature. They are intended to make the child support scheme work better for all who are involved in it.
1
Write-off of penalty debt
(Clause 32)
Summary of proposed changes
The proposed changes are intended to bring non-payers back into the payment system. When liable persons enter an agreement with Inland Revenue to maintain payments of their current liability and pay off their financial support arrears, their incremental penalties accrued before the date of the agreement will be written off at six-monthly review points if they maintain payments under the agreement. The write-offs are to be based on a pro rata percentage of the core financial support arrears, including 10% penalties that have been paid.
For liable persons who default on their payment agreement there is to be no write-off at the next review point. They will have to negotiate and comply with a new agreement before they again qualify for a write-off.
Liable persons who are already complying with a payment arrangement for their arrears will also benefit from the changes in respect of payments they make from the time the legislation comes into effect.
About 3,000 liable persons currently owe penalty debt only. For them and others who reach that position, Inland Revenue is to have discretion to take a case-by-case approach, with the objective of achieving maximum possible recovery. The exercise of the discretion will involve consideration of whether hardship exists or whether continued attempts at recovery would represent an inefficient use of resources.
Application date
The amendments will apply to new arrangements entered into from enactment and to payments made on existing arrangements after enactment.
Key features
The existing provisions relating to penalties have been rewritten to provide a consistent form for the granting of relief from them.
The new provisions for relief from penalties are contained in sections 135G, 135J, 135K and 135L.
When a liable person has no current or future liability for financial support, all initial 10% penalties have been paid, and all that remain are incremental penalties, section 135G gives the Commissioner of Inland Revenue the discretion to consider writing off those incremental penalties.
When there is continuing liability, or arrears still to pay, the write-off of accrued incremental penalties is to be mandatory if the terms of a payment agreement have been complied with. Section 135J provides a formula for the calculation of the amount that is to be written off at 26-weekly review points for new agreements.
Background
Unpaid financial support penalties exceed outstanding core liabilities, and over half of all liable persons have some arrears of liability to pay. When they fail to pay in full on time, an initial penalty of 10% of the shortfall is imposed, with further incremental penalties of 2% for each month that the amount remains outstanding. Each unpaid monthly instalment compounds at the rate of 36.8% in the first year and thereafter at 26.8% per year. The penalty debt acts as a disincentive to re-enter the child support payment system.
The Child Support Act contains provisions for the write-off of the initial late payment penalty when specified conditions are met and of ongoing incremental penalties when payment arrangements are adhered to. However, there is currently no flexibility in respect of the accumulated incremental penalties.
Detailed analysis
Sections 135 and 135B of the Act are to be repealed and replaced by new sections 135 to 135O, which will incorporate the existing provisions relating to write-off of late payment penalties.
Key terms in the new sections are defined in section 135, while section 135A describes the manner in which Inland Revenue may grant relief from penalties.
Sections 135B to 135F describe the existing discretionary power available to Inland Revenue to grant relief from penalties, while section 135G introduces the new discretion in relation to residual penalty debt. This new power will be exercised when there is no current or future liability for financial support, all initial 10% penalties have paid, and all that remain are incremental penalties. Inland Revenue must have regard to whether recovery is an inefficient use of resources or whether it would place the liable person in serious hardship as defined in the section.
The provisions for mandatory relief in respect of the initial late payment penalty that are currently in section 135A are to be located in new sections 135H and 135I.
New section 135J provides for mandatory relief from incremental penalties that were incurred before a payment agreement made between Inland Revenue and the liable person to pay the full current liability, together with an amount towards the recovery of arrears. The relief will be granted when the payment agreement has been complied with for 26 weeks, and at the end of each following 26-week period until the arrears, including related initial late payment penalties, have been paid in full. The proportion of total incremental penalties that will be written off at the end of each period will be equal to the proportion of total arrears that have been repaid in that period.
The formula is modified in section 135K in respect of arrangements that are already in place, while section 135L gives Inland Revenue the discretion to disregard failures to make a payment under an agreement in specified circumstances.
The mandatory relief from continuing incremental penalties currently in subsection 135(3) will be in new sections 135M and 135N.
New section 135O provides for refunds to be made out of a Crown Bank Account and for the new provisions to apply to penalties that are imposed before or after the new legislation comes into force.
Exemptions from liability
(Clauses 8, 12,13,14,15, 16 17, 18, 25, 27, 28, 29, 30, 31, 35, 37, 38, 45, 46, 47, 52 & 53)
Summary of proposed changes
The bill introduces two new exemptions from liability for child support:
- a permanent exemption for victims of sex offences; and
- a temporary exemption for liable parents under the age of 16 years.
Victims of sexual crimes should not be further victimised by being required to pay child support for a child born as a result of the crime, particularly if the payments are to be made to the offender. The new provision will let victims off any child support obligations permanently once offenders have been convicted.
Some young people become liable to pay child support when their attendance at school is compulsory and their primary focus should be on educational achievements rather than on earning an income in order to pay child support.
These young people are in a somewhat similar position to prisoners and hospital patients in that their ability to earn an income is limited by matters beyond their control, so they are also to be exempt from liability. If, however, they choose to undertake part-time or casual employment they should make a contribution towards the support of their child, so they will lose the exemption.
These new exemptions are incorporated in a new Part 5A. It also restructures the current provisions relating to exemptions, makes some remedial changes to them and includes new provisions for determinations that exemptions be set aside on application from the payee.
Application date
The amendments will apply from enactment.
Key features
Victims of sex offences
Subpart 4 of new Part 5A provides for exemption of the victim from liability for child support for a child born as a result of an offence under the relevant sections of the Crimes Act 1961. New section 89Z requires Inland Revenue to grant a permanent exemption when satisfied that the requirements for the exemption have been met.
Section 89ZA provides for the exemption to be withdrawn if a conviction is overturned on appeal, but allows a new application for exemption in the event of a new conviction at re-trial.
Liable parents under age 16
Young people are to be exempt from child support liability until they reach age 16 years, in accordance with new section 89E, subject to the same income criteria that apply to hospital patients and prisoners. That means they cannot have earned income, but they can receive investment income, such as interest on a bank account, up to the level of the current minimum amount of child support. They have three months after they reach age 16 years to apply for an exemption.
Remedial changes
Hospital patients are to have three months after discharge to apply for an exemption.
When an exemption has retrospective effect Inland Revenue will not refund any payments made by the liable person. Such payments will be applied to past or future liability.
Background
Recent changes to provisions relating to sexual crimes in the Crimes Act 1961 highlighted the potential for victims of sexual crimes to become liable for child support when a child is born as a result.
The two most likely scenarios are:
- A male who is the victim of abuse by an older female fathers a child as a result of the sexual act.
- A female victim of abuse gives birth to a child as a result of the sexual act. She later has the child placed in foster care and becomes a liable parent in relation to the child.
In both cases the obligation to pay child support would be likely to add to the trauma already experienced by the victim.
Consideration of that specific issue also raised concerns about the consequences for young people in general of becoming liable for child support at a time when their earning ability is limited through compulsory requirements for attendance at school. The reality is that if their parents do not help them to meet their obligations, they are likely to accumulate a debt that could ultimately act as a barrier to their successful transition into the workforce.
Allowing an exemption for young people does create some conflict with the rights of their children to receive financial support, particularly if the custodian is also under the age of 16 and consequently not eligible for income assistance. However, the exemption is only for a limited period and is probably in the long-term interests of both young parents and their children.
The exemptions will not preclude voluntary payments, nor will it be compulsory to apply for them.
Because there are differences in the qualifying criteria, the new Part 5A provides separately for each category of exemption.
Detailed analysis
The existing sections 73 to 76, relating to exemptions from liability, are to be repealed and a new Part 5A is being inserted.
Section 89A outlines the content as a guide to the general scheme and effect of the new part, while definitions specific to the new part are contained in section 89B.
In Subpart 2, sections 89C and 89D contain the criteria for the existing exemptions for hospital patients and prisoners.
Section 89E provides that a liable person under 16 years may apply for an exemption if his or her income during the period of the exemption will be nil unless it is solely from investments, in which case it must be less than the minimum rate of child support that is current at the time of the exemption. These are the same income criteria that apply to the exemptions for prisoners.
The provisions for cessation of an exemption are contained in section 89F, which sets out the rules that apply when the income criteria are not met at any time during a child support year in which an exemption would otherwise be available, and in section 89G.
Section 89H sets out the requirements for an application for an exemption that must be met before the Commissioner can give effect to an exemption in accordance with section 89I.
Section 89J prevents persons who have been granted an exemption from receiving a refund of any payments they may have made during the entitlement period and contains rules for the allocation of any such payments.
Section 89K in subpart 3 allows for determinations to be made by the Commissioner that an exemption does not apply and, in the case of child support payable under a formula assessment, for a departure from the formula.
The requirements of an application for a determination under this subpart are set out in section 89L.
Section 89M allows the Commissioner to make a determination that an exemption does not apply or ceases to apply so that the amount payable before the granting of the exemption is reinstated, or to confirm that an exemption is to continue.
In the case of child support payable under a formula assessment, the Commissioner may, in accordance with section 89N, make a determination to depart from the provisions of the Act in relation to a child.
In making these determinations the Commissioner must have regard to the income, earning capacity, property and financial resources of the liable person. The procedural arrangements are set out in sections 89O to 89X.
The provisions for the new permanent exemption for victims of sexual offences are contained in subpart 4. Section 89Y sets out the application requirements.
In accordance with section 89Z, Inland Revenue must be satisfied that the parent had become liable to pay child support as a result of being the victim of a sex offence under the Crimes Act 1961, and the offender must have been convicted of that offence or the case proven if heard in the Youth Court. In order to minimise the trauma for victims, the section also provides for Inland Revenue to carry out all necessary enquiries of the New Zealand Police or the Ministry of Justice, before granting an exemption.
Section 89ZA provides for the exemption to be void if the conviction is quashed or the finding is reversed or set aside, but allows a new application if there is a new conviction at re-trial.
The miscellaneous provisions that apply generally to exemptions are contained in subpart 5, sections 89ZB to 89ZD, together with the new provision in section 89ZE that allows an agent to apply for an exemption on behalf of a liable person.
A consequential amendment to section 90(1)(i) of the Act allows objections against any decision not to grant an exemption under the new Part 5A.
The rules for allocation of payments made during a period when there is entitlement to an exemption may create a repayment requirement for a custodian who is not a beneficiary. Section 152A requires Inland Revenue to write off the whole of a debt that arises in this situation. In a similar manner, an exempted person is prevented from recovering from a payee any amount paid in respect of any exempt period through a provision in new section 89J and an amendment to section 207.